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Hi all!

New to the board so have lots of catch up to do. In the meanwhile I was wondering if anyone had knowledge about the following situation:

Just started a new job with a company that has no 401K vehicle. "Instead" there is a Profit Sharing Plan in which the owner has always put 15% of a person's salary. However, the vesting doesn't start for 2 years, then 20% each year. Thus 100% vesting at 7 years, may I be there that long!

While it is nice that the owner is putting away 15% of my salary for me (though there are no real guarantees he'll continue to do that), I am concerned because I don't have the kind of control that I would in a 401K, nor is there any of *my* money that I will get back should the job not work out for 2+ years. Are there any vehicles that I can use to make up for the loss of putting my own 15% away that would be tax deductible as the 401K is? Already was doing the IRA (in my case Roth) but that is limited and hardly makes up for the 15% that was going into 401K. Am I stuck with taxable accounts?

I'd appreciate any pointers, especially to previous discussions since I may not get to them right away as I catch up.

Ghislaine
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Are there any vehicles that I can use to make up for the loss of putting my own 15% away that would be tax deductible as the 401K is?

A traditional IRA would be the only other choice.

Already was doing the IRA (in my case Roth) but that is limited and hardly makes up for the 15% that was going into 401K. Am I stuck with taxable accounts?

Pretty much. But remember that the profit sharing plan is money in addition to your own savings, unlike a 401k that comes out of your salary. So if you remain with the same employer long enough to vest in the plan, you'll get additional compensation in the amount of the profit sharing contributions (plus their earnings).

These plans are an incentive to stay with the same employer for a longer term. Employee turnover is expensive to a company, and it's in their best interest to reduce it where possible.

--Peter
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But remember that the profit sharing plan is money in addition to your own savings, unlike a 401k that comes out of your salary. So if you remain with the same employer long enough to vest in the plan, you'll get additional compensation in the amount of the profit sharing contributions (plus their earnings).

These plans are an incentive to stay with the same employer for a longer term. Employee turnover is expensive to a company, and it's in their best interest to reduce it where possible.


I agree Peter.

It's amazing how many people think 401K are "better" vehicles (in quotes because to some I can see how they would be) when if they intend on staying with the employer (the main "benefit" that is touted about 401Ks) they are actually better off financially with a profit sharing plan.

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There seems to be a reasonable solution to your problem. Have your employer add the 401k feature to the Profit Sharing Plan.
Ask them to do so. There should be no reason why they wouldn't do it. A profit sharing plan and a 401k are run off the same plan document. They can be run as one single plan. There should be no additional cost to do so, except for a plan ammendment fee. That usually runs anywhere from $200-$500 and is a one time expense. Your employer should not be worried about Top Heavy testing or discrimination testing. All they have to do is set the plan up to be a Safe harbor Plan and they are exempt. The First 3% of pay would be 100% vested under a safe harbor, then the other 12% can have a vesting schedule.
This will allow alll employees, including the owner(s) to contribute up to $11,000 on a pre-tax basis next year. If they say they don't want to add a 401k feature, ask why and follow up here. There shouldn't be much of a reason,. Any employer generous enough to contribute 15% of pay for their employees shouldn't have an issue with a 401k.
The only reason the employer may have will not be valid in 2002.
The employer gets a tax deduction for any contributions to a qualified plan. The deduction can not exceed 15% of gross payroll. In the past any employee money was included in the calculation. This has changed for 2002. Now only employer contributions are included in the calculation and the deduction limit has been raised to 25%.

Hope this helps.

Bill
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So if I understand correctly, if the owner takes me up on the suggestion of this 401K/Profit Sharing Plan, since he would probably still put in the 15%, I will still not be able to put any of *my* money in. However, I will be vested a little bit right away due to the Safe Harbor 3%? And maybe in 2002 I could put some in if the owner doesn't want to increase his tax deduction?

I recognize that the current plan is set up the way it is, to encourage employees to stay with the company. My (informal) education has ensured my understanding of the cost of high turnover. However my question was related to *my* needs due to past history of not staying at a job as long as two years. I have been burned by the salesmen of Human Resources Departments too often. I believe I may have found a good company that truly does what it advertises, but time will tell. My experiences have given me a certain amount of cynicism and lack of faith that includes planning for the worst and trying to plan for my goals without relying on others.

Please excuse my run on sentences and my cynicism!

Ghislaine
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Bill,

I have two questions. The first is:

The only reason the employer may have will not be valid in 2002.


What's this reason?

The second question is wouldn't this limit the amount the employer might be able to contribute for THEMSELVES? In our PS plan the employer puts in $35,000 for himself this year and I thought 401K was limited to $11,000. Why would he want to reduce his own contributions, or am I wrong?

Thanks,
e
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Sorry for the confusion on my earlier post. Hoep this clarifies it a little.

Lets assume the 401k is only employee money (yours), and the Profit sharing is all the employer money. (in your case a very generous 15% of pay)
Under 2001 rules, the employer gets a business tax deduction of any money contributed to the plan.(Employee + Employer) The maximum deduction he can take is 15% of gross payroll. So, if the employer is willing to contribute 15% of pay, and if he allowed employees to contribute he would not get a full tax deduction. If he just limits contributions to the plan to just the employer 15% then he can get the full deduction. You see, under current laws, any employee contributions eat into the 15% of payroll.

In 2002, the employer can take a deduction of up to 25% of gross payroll, and employee contributions do not count against this. So any money that employees contribute will not affect the ability for the business to get a tax deduction.
So, under the 2002 rules, there is no reason to keep employees from contributing.

I would ask your employer to allow a 401k provision so each employee has the ability to contribute up to $11,000 in 2002. If they say no, ask what the reasoning is for this. There should be no major issues in allowing employees to set aside their own money in the plan.

Hope this helps.

Bill
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I apologize for the confusion. Please read my second post for what I hope is some clarification on the reason why an employer will be able to take a larger deduction in 2002 and employee contribtions won't hurt that ability next year.

As far as the $40,000 limit vs the $11,000 limit. (2002 numbers)
here goes.

Any employee may make contributions to a 401k up to 100% of pay but not to exceed $11,000. That limit will go up each year until it reaches $15,000 and then it will be indexed for inflation in $500 increments.
If you are over 50 and are making the maximum contribution allowed, you may make an additional $1,000 contribution. This figure will also go up $1,000 per year until it reaches $5,000

The employer can contribute 25% of pay to any one individual. As long as the total dollar limit received (employee =Employer) by that 1 employee does not exceed $40,000 or 100% of pay.

So if your boss is makes $100,000, he can put in 25% of pay from the business and $11,000 as an employee.

If your boss makes $200,000 then 25% of that would be $50,000 and would exceed the $40,000 cap. He would only be able to receive $40,000 from the employer contribution and would not be able to make employee contributions to the 401k.

You can(and most companies do) run a 401k with a profit sharing plan. There are limtis that the IRS imposes that can restrict what people can receive in total.
Hope this helped.

Bill
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Thank you!
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Ditto!

Yes, thank you Bill. I will be asking if I can see the current plan documents and then suggest your suggestion to the controller. Seems as though there are benefits for all as soon as next year!
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In my case, the employer is too small, and so the plan administrator laughs when we ask about 401(k) amendments.

If we transferred to a different provider who caters to small 401(k) plans, it would be different.
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